The belief that national economies and cultures are dissolving before the great flows of trade, finance and information, leaving in their wake an increasingly homogenised, global market society, has become part of the common sense of educated people. It is now widely believed that nations, companies and individuals no longer have any choice but to adapt to intensifying global competitive pressures. All that states can do, if they are not to disadvantage their citizens, is to help make their territory attractive to internationally mobile capital.
For the past decade, belief in globalisation has been spreading among academics, media commentators and politicians of left and right. Many of them welcome it. In his influential book The Borderless World, the management guru Kenichi Ohmae argues that globalisation means that at last markets can develop on a scale which allows them to escape from the inefficient grasp of governments. Unconstrained global markets for capital and goods allows companies to allocate resources to maximise benefits for consumers. Others, less convinced of the inherent wisdom of the market (such as most of the moderate left) nevertheless feel powerless before the logic of globalism. At best, they argue, public policy can promote national competitiveness by investing in training and in the public infrastructure that business requires. This is the view of Robert Reich, the US Secretary of Labour, in The Work of Nations. The left has become convinced that its tax, welfare and public spending options have virtually disappeared. In last year's Mais lecture, Tony Blair said that global markets now placed "strict limits" on Labour's tax policies.
Whether or not it correctly describes the reality of the international economy, the influence of the theory of globalisation means that it may become a self-fulfilling prophecy. Policy makers, especially in the US and the UK, appear to be in the grip of a pathology of over-diminished expectations about what governments can do. In the past few months the intellectual fashion in the UK has, however, begun to shift. A more sceptical counter-argument to the globalisers, to which this essay is a contribution, is gaining some ground. But before reviewing the evidence for globalisation, I shall spell out the social and political issues at stake. For if globalisation really is occurring, then we face a very bleak future indeed.
A truly global economy will render obsolete the expectations developed in the advanced world during the long boom after 1945. The civilising of capitalism by public policy and state action will be abandoned. Globalisation means a return to the social Darwinian belief in the supreme value of the survival of the fittest.
A global economy would be highly vulnerable to the unintended effects of markets: for example, to a slump brought on by the crash of volatile financial markets, and to irreversible environmental damage caused by unregulated industrial development in poorer countries. In such an unstable economic system the lives of all but the super-rich would be extremely insecure. If states are unable to alter their macro-economic environment, and their welfare spending is constrained by international competitive pressures, then public responses to such uncertainty would be undermined. Individuals would increasingly seek to protect themselves, investing in their own competitiveness and privately insuring themselves against such risks as they could afford to cover. As Robert Skidelsky argued in the last issue of Prospect, the need for self-protection would in turn reinforce the tax-aversion of the successful and tend to make them hostile to welfare spending on others. Those who failed in the competitive struggle for survival would increasingly be judged inadequate rather than unfortunate-they failed to strive, failed to invest in their skills, failed to make provision for contingencies.
This conception of society is what underlies the politics of radical Republicans such as Newt Gingrich. In a globalised world, atomised individualism and highly local loyalties make more sense to the successful than continued commitment to communities based on powerless national states. In a globalised economy, mainstream political parties competing to control the policies of the nation state would matter less and less. National politics would become akin to today's municipal politics. This would bore the talented, who would desert professional politics for business, the media and issue-based activism. Thus the weakening of the capacities of the state brought about by global markets could become self-reinforcing, as people will come to expect less of national politics.
At the international level, too, politics will matter less compared to the power of the global markets. States which threaten the interests of world business will be crushed by economic sanctions. The dream of free market liberals such as Cobden and Bright will at last be realised: free trade will triumph over political authority. Only authoritarian societies willing to pay the price of economic backwardness for religious or ethnic reasons will be outside this logic.
are we moving inexorably in the directions set out above? And if we are, is globalisation the cause? For all the vigour with which the new conventional wisdom is presented, the evidence is scarce. Most globalisers are unclear about what a truly global economic system would look like, and therefore have little idea what could count as decisive evidence for or against its existence. For example, no one disputes that there has been a rapid increase in world trade and in foreign direct investment (FDI) since the early 1970s, but is this sound evidence for globalisation? Most of the evidence is compatible with something very different from globalisation-an open international economy in which trade and investment take place between the distinct national economies of the advanced countries and in which companies, although active multinationally, remain committed to national bases and conduct the bulk of their business within their home region. Such a system is quite different from a global economy in which national economies have been subsumed, in which markets have become autonomous and ungovernable, and in which stateless trans-national corporations predominate.
Some mainstream commentators are now challenging the notion that the nation state has been rendered obsolete by the rapid growth in trade and direct investment. Martin Wolf recently wrote in the Financial Times that the current degree of international openness of the major economies is no greater than it was before 1914-and few people thought the state was powerless then. An editorial in The Economist at the end of last year pointed out that government spending as a proportion of GDP is rising, not falling, in most developed countries. It also argued that global economic forces are not causing economic convergence, citing the wide variation in the proportion of public spending to GDP (from 20 per cent in Singapore to 68 per cent in Sweden). The Economist might have added-pace Tony Blair-that even two similar European economies, such as the UK and Denmark, vary substantially, with the British government taking 36 per cent of GDP in tax compared with over 50 per cent in Denmark.
Globalisers believe that such differences will gradually disappear. They point to the much greater interpenetration of national economies as a result of the recent growth in trade (especially in services) which now accounts for 20 per cent of world GDP; to the nearly 40 per cent of world trade which takes place within multinational companies; and to the sheer scale of the international currency and bond markets. Andrew Marr of the Independent points out that high proportions of public spending to national income can be seen as an index of economic failure, rather than evidence against globalisation. For the moment, he says, the state has some leeway over how it taxes and spends, but in the long term it will have to conform to global economic realities or take the punishment inflicted by internationally mobile capital.
Yet public spending is not in itself an index of economic failure. Societies have different characteristics and public spending ratios reflect distinct political choices. Thus Sweden has had a high level of public spending to GDP for a long time, including the period when it was seen as a model of high-tech competitiveness and had very low unemployment. Singapore's low level of public spending is a result of its recent very rapid growth; it has been an industrialising rather than a mature economy. What is important is not the level of public spending in itself, but the competitiveness of the internationally tradeable sectors of a country.
The rhetoric of globalisation has more fundamental weaknesses. For one thing, globalisers have short memories. They talk as if national economies were almost closed systems until the 1970s. Yet the international economy has changed frequently and radically since a modern industrial trading system was first developed in the 1870s. In many ways the international economy was more open in the period leading up to 1914 than it is today. If globalisation ever existed, it was during the belle ?poque.
Capital was highly mobile in the decades up to the first world war; even now foreign direct investment remains at about half the level of 1913 in relation to world output, despite the huge increase of the past ten years. In 1914 over 25 per cent of British wealth was invested abroad; in the 1980s, when Japan was said to be buying up the world, only 11 to 12 per cent of Japanese savings went on foreign assets. The globalisers also like to stress the technological novelty of instant money transfer-but submarine cables have allowed "real time" trading between the world's main financial centres for more than 100 years.
In other areas, too, the belle ?poque provides a globalisation bench-mark. Trade to GDP ratios for the leading industrial countries have only in the past decade begun to match pre-first world war levels. Labour was much more mobile in the late 19th century. European labour flowed freely to the younger growing economies, whereas today economic migrants are feared and discriminated against. Finally, the gold standard ensured that the international monetary system was beyond the control of any state, even the UK. States had to adapt to monetary movements but they could not directly control exchange rates.
If the belle ?poque was more global than the new globalisers care to remember, the 1945-73 period was less national. The golden era of national economic management after the second world war was dependent on an international trading system controlled by international institutions that promoted growth. The managed multilateralism of post-1945 was largely an Anglo-American creation. It was sustained by US hegemony and by its willingness to bear the costs of underwriting the system. The Bretton Woods system of fixed exchange rates, Marshall Aid, Gatt, large-scale American corporate investment abroad, and US military aid, all helped to promote domestic growth in allied states and boost world trade. Indeed, international trade grew faster than did domestic output between 1950-73, and faster than in the supposed era of globalisation after 1973. The dismantling of this system was driven by national, often short term, policy considerations: states de-regulated and abandoned exchange controls from the late 1970s out of choice rather than because of technology or market pressure.
The ungovernability of financial markets is consistently over-emphasised by the globalisers. Currency and bond markets are the most global and lightly regulated of all, but capital markets in general remain quite tightly controlled and nationally based. There is, for example, no single European capital market, and there are great variations in the systems of personal savings and company finance across the continent.
Furthermore, the greatest currency turbulence in modern times was caused by deliberate acts of price-fixing by nation states-the oil price-hikes of Opec in 1973 and 1978. Given the intensity of the inflationary crisis of the 1970s, it is difficult to see how any international monetary regime could have survived. Yet thanks to the Plaza Accord of 1985 and the Louvre Accord of 1987, some stabilisation in exchange rates between Europe, Japan and the US was achieved. Similarly, the European monetary system (EMS) served to stabilise exchange rates in Europe from 1979-92. At present the battles between public policy and the currency markets are far from settled. The main problems-the over-valuation of the Deutschmark and the Yen-remain unresolved because of differences of interest between the US and the Japanese governments, not because of market power.
It is true that the volume of international currency trading-one trillion dollars per day-limits the effectiveness of central bank interventions. Yet these volumes represent short term market transactions by financial institutions and could be rapidly "cooled" by a modest turnover tax on short term transactions. The problem here is not primarily a technical one: it is to convince governments, financial institutions and companies that market volatility is a greater problem than the implementation of a complex new tax.
The difficulties of the EMS in 1992-93 do not contradict the fact that the markets can in principle be guided. The policies of several countries, especially the UK, provoked the markets by being stubbornly committed to unrealistic and unsustainable rates against the Deutschmark. Stupidity in public policy is no reason to believe that all governance is ineffective; simply that it should not grossly violate the interests of economic actors.
Globalisers exaggerate the "end of geography" for large companies as well as capital markets. Most multi-national companies conduct most of their business within their home region, such as North America, Asia-Pacific or Europe; typically the figure is around 60-70 per cent of sales and about the same for assets. This does not mean that companies are not internationally oriented, but that they have a recognisable national/regional "base" from which they operate, and in which they keep the key value-adding parts of their activities such as research and development, and core manufacturing. Companies use foreign direct investment in subsidiaries and branch plants in other countries to facilitate trade, but they remain distinctly "national" (Ford is unmistakably an American company despite its global reach, and Sony is distinctly Japanese despite its large acquisitions in the US). Companies continue to derive benefits from the complex of institutions which form a national business system, even if the days of interventionist state industrial policy and "national champions" are over.
Finally, the weightiest evidence for globalisation is said to be found in the rapid spread of FDI in less developed countries, and in the rapid growth of countries such as China and India, which will create a truly global economy in the early 21st century. But at present trade and investment remain distinctly lumpy; the rich world of North America, Japan and Europe accounts for 14 per cent of the world's population, but 75 per cent of investment flows in the period 1980-91; in 1992 the same countries accounted for approximately 70 per cent of export trade. Capital is not fleeing from the developed world to low wage countries. FDI is flowing to a select minority of developing countries-Singapore, Malaysia, Mexico and the coastal provinces of China taking the lion's share. At face value the volumes of FDI flowing to less developed countries seem huge: for example, they surged from $31 billion in 1990 to $80 billion in 1993. This increase is closely correlated with a severe recession in the developed world, and the economist Paul Krugman has calculated that the entire net outflow of investment between 1990 and 1994 has reduced the total capital stock of the advanced world by a mere 0.5 per cent.
Prospects for growth in the third world are uncertain. Latin American growth rates are notoriously volatile-Mexico has gone from success story to basket case in a few months. East Asian growth rates have been spectacular in countries such as Singapore and South Korea, but they are unlikely to continue to grow indefinitely at rates of 9 per cent per annum. In part these rates reflect a one-off investment-part of the process of conversion to a modern market society. Moreover, countries such as Singapore have staggeringly high export to GDP ratios-185 per cent in 1991-suggesting that the growth of the so-called East Asian "tigers" depends directly on first world prosperity.
The three most wealthy regions in the world will retain their dominance of output, investment and trade, and will have the capacity to regulate the world economy if they can agree on how to do it. Moreover, the EU and Nafta (US, Canada and Mexico) remain quasi-autarchic: they still exported only about 10 per cent of their GDP in 1990; even Japan exported only 11 per cent. If they wished, the big regional trade blocs of the EU and Nafta could go it alone, imposing distinct regional policies and maintaining distinct regimes of welfare and labour rights.
But the need for protectionism to protect wages and labour rights may be less than many people assume. Low wage competition from developing countries has undermined some industries in the developed world, but trade in manufactures with developing countries counts for less than 2 per cent of the GDP of developed countries. And as countries get richer the share of services in total employment rises. Some services can be exported, but most-including caring for ageing populations-cannot. Indeed, it may be that the two economic clich?s of our time-globalisation and the onward march of the service sector-are in fundamental conflict.
But if we are not at the mercy of uncontrolled market forces as the globalisers suggest, it is unlikely that we will return to the managed multilateralism of 1945-73. Equally, while the world economy may not be becoming truly global, there is clearly a shift in economic power eastwards, which is keenly felt by those in the west whose governments once set the rules.
More than ever before, the effective governance of the world economy will require the nation state to relinquish authority to regional and international bodies; to become a broker rather than a sovereign entity. This will not be easy and will require, at the very least, a more outward-looking attitude from national politicians and informed publics.
What makes the concept of globalisation so destructive, at least in its purest forms, is that it denies the possibility of governance at all. Globalisation is a myth, unsustained by the evidence. It is a myth that serves the interests of neither business nor labour. The world remains international rather than global, and the nation state continues to be the main repository of democratic legitimacy and emotional identification. Both alone and in concert with others, the nation state can still guide economic forces. There is still scope for mitigating the effect of change on people through tax and fiscal systems and when governments act in unison they can even buck the supposedly all-powerful currency markets. Globalisation is the ideology of a pessimistic era which leaves us standing helpless before the future.
